Friday, July 15, 2011

Friday Watch


Evening Headlines


Bloomberg:

  • European Bank Stress Tests Compromised by Greek Non-Default, German Mutiny. European regulators’ attempts to bolster confidence in the region’s banking industry today are being undermined by their unwillingness to test for a Greek default and a mutiny by Germany’s Landesbank Hessen-Thueringen. The European Banking Authority will release the results of the stress tests for 91 banks as part of an effort to reassure investors the region’s banks have sufficient capital. Helaba, as the landesbank is known, refused to allow the EBA to publish its results in full, saying the EBA’s data “would lead to a halving of the core capital without legal grounds.” German regulator Bafin has also attacked the London-based EBA. Bafin Chairman Jochen Sanio said last month the watchdog lacks “legitimacy.” “The EBA has no teeth,” Bob Penn, financial-services partner at Allen & Overy LLP, said in a telephone interview in London. It can’t “make requirements from any individual bank because the framework was set up to allow national regulators to keep supervisory powers,” he said. “This isn’t Helaba poking a stick in the eye of the EBA, it’s Bafin.”
  • About 10 Banks May Fail European Capital Stress Tests, FT Says. Results of European bank stress tests to be released later today may show that about 10 failed because they had less than the required five percent core tier 1 capital, the Financial Times reported, without saying where it got the information. The publication of the test results on 91 banks could lead to a series of distressed debt deals as the disclosure of previously unpublished information on banks’ credit exposures could prompt bids for credit portfolios from specialist buyers, the FT said, citing unnamed investment bankers and restructuring consultants.
  • Europe Group Says Basel OTC Rules Have 'No Logic," FT Reports. The European Association of Corporate Treasurers said in a briefing note for European Union officials that new Basel rules on bank capital, that assign higher than expected capital costs to over-the-counter derivative transactions carried out by banks, have “no logic” unless the intention is “punitive behaviour towards OTC derivatives,” the Financial Times reported, citing the note. This is “a flaw that is irrational in substance,” the EACT said, according to the newspaper.
  • Sovereign Default Concern Spurs Texas Fund to Weigh Added Hedges. Concern that Texas's public university endowment may lose a fifth of its value from a major euro-zone default or a crisis in the dollar prompted calls for more aggressive hedging today. Managers who oversee the $20.3 billion fund should beef up protection against market declines, said Gene Powell, the chairman of the University of Texas Board of Regents. "We need to do this and do it very soon," Powell said during a meeting of the fund manager's board in Austin. "None of us saw 2008 and this could be worse than 2008."
  • CFTC Will Postpone Dodd-Frank Regulations for $601 Trillion Swaps Market. The U.S. Commodity Futures Trading Commission finalized a plan delaying until as late as the end of the year new regulations for the $601 trillion swaps market. The CFTC published an order today that would provide “temporary relief” from Dodd-Frank Act rules that had been slated to take effect on July 16, a year after the law’s enactment. The delay will give the CFTC time to write more than 40 rules aimed at reducing risk and boosting transparency after largely unregulated trades helped fuel the 2008 credit crisis.
  • PIMCO is staying cautious on Asia's bond market as the debt crisis in developed nations clouds prospects for China, India and Indonesia. "In the next six to twelve months, it's going to be quite bumpy on the global front," Chia-Liang Lian, Pimco's Singapore-based emerging-markets portfolio manager, said in an interview in Hong Kong. "We'll continue to maintain a very defensive posture in regard to our credit selection in Asian credit space."
  • JPMorgan's(JPM) Dimon Says Mortgage Clash Swells as 'Everybody Is Going to Sue'. JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said clashes over faulty mortgages may drag on as investors and regulators demand compensation for soured loans issued at the peak of the housing market. “There have been so many flaws in mortgages that it’s been an unmitigated disaster,” Dimon said during a conference call today. “We just really need to clean it up for the sake of everybody. And everybody is going to sue everybody else, and it’s going to go on for a long time.”
  • Americans Lose Faith in Stock Pickers. Money continues to pour out of mutual funds that buy U.S. stocks. Investors are showing increasing disenchantment with money managers who pick U.S. stocks. Mutual funds that invest in domestic equities have lost an estimated $8 billion to redemptions this year through June 29, putting them on track for an unprecedented five straight years of withdrawals, according to data from the Investment Company Institute. Over the 10 years through May 31, investors withdrew $51 billion more from domestic equity funds than they deposited.
  • Citrix Systems(CTXS) Acquires Cloud.com to Challenge Rivals VMware(VMW), Amazon(AMZN).
  • BHP Billiton(BHP) to Acquire Petrohawk(HK) for $12.1B. BHP Billiton Ltd. (BHP), the world’s largest mining company, agreed to acquire Petrohawk Energy Corp. (HK) for about $12.1 billion in cash in its biggest acquisition. Melbourne-based BHP will pay $38.75 a share using cash and loans, the companies said in a statement today. That’s 61 percent more than Houston-based Petrohawk’s average price over the past 20 trading days and compares with the 25 percent average premium in 17 deals worth at least $5 billion for oil and gas producers in the past five years, Bloomberg data show.
  • Ralcorp(RAH) to Spin Off Post Foods After Failing to Find Buyer for Cereal Unit. Separately, Ralcorp said third-quarter profit excluding some items may be as much as $1.18 per share, trailing the $1.38 average of 11 analysts’ estimates compiled by Bloomberg. The company also cut its full-year profit projection to $5.20 to $5.35 a share from a May forecast of as much as $5.55, because of surging raw-ingredient costs. Ralcorp fell $4.62, or 5.3 percent, to $82 at 5:55 p.m. in trading after the regular close of the New York Stock Exchange.
Wall Street Journal:
  • Plan B Emerges on Debt. A backup plan to cut the federal deficit and keep the U.S. government from default gained momentum Thursday even as President Barack Obama and congressional leaders paused their negotiations to determine if they can reach a deal. Ratcheting higher the pressure on Washington to strike a deal, Standard & Poor's for the first time said there was a 50% chance it would downgrade its rating of long-term U.S. debt within three months because the chances of default were "increasing" and the political debate about deficit reduction and the debt ceiling had "only become more entangled."
  • Italy Urges Unity on Debt Crisis. Italy, caught in the cross-hairs of financial markets, is renewing its push for common European bonds as the answer to a growing loss of confidence in European governments' ability to contain a crisis that is engulfing 40% of the euro zone's economy. In an interview on Thursday, Italian Economy Minister Giulio Tremonti said the stalemate over how to provide more aid to debt-laden Greece underscored deeper discord that has hampered the euro-zone for months. "The historical function and trend of the European Union, by design, has always been convergence. What's emerging now is segmentation, egoism, localism," he said. Italy, Europe's third-largest economy, has suddenly been drawn into the Continent's debt crisis as escalating worries over Greece's solvency have spilled over to Italy, whose debt load is 120% of gross domestic product. Although Italy successfully sold €5 billion in long-term public debt on Thursday, yields on 10-year bonds have continued to rise to 5.63%. Their spread over equivalent German debt widened to 2.9 percentage points from 2.07 points a week ago. "After the spirit of May came the autumnal spirit of Deauville and that season hasn't ended," Mr. Tremonti said, adding that eurobonds could be the solution for newfound unity. "I am for eurobonds.…Eurobonds are in the spirit of May." Mr. Tremonti has long been a proponent of eurobonds, a debt instrument that would be jointly backed by all members that share the euro. Mr. Tremonti believes these bonds should gradually replace large chunks of national debts in the euro zone. Mr. Tremonti said eurobonds need not necessarily exclude private-sector involvement. He added that euro-zone countries would only bridge their differences "when everybody realizes the crisis, which already affects 40% of the euro zone, is a common problem."
  • As Its Deposits Soar, J.P. Morgan Parks Cash at Central Banks. As deposits piled up at J.P. Morgan Chase & Co. (JPM) in the second quarter, the bank took them and parked the money in deposits at central banks around the world. The giant bank parked $170 billion in deposits at central banks at the end of June, it reported Thursday. The amount was four times the amount a year earlier, and is considerably more than all the deposits held by SunTrust Banks Inc. (STI), which, with about $120 billion in deposits, is the seventh-largest U.S. bank by that measure.
  • Fiat Preps Chrysler Merger. Chrysler Group LLC and Fiat SpA, auto makers that bounced back from severe financial crises a few years ago, are preparing to rejoin the auto industry's top ranks through a merger that would have the financial and production heft to compete globally. Sergio Marchionne, chief executive officer of Chrysler and Fiat, has begun selecting a single executive team to oversee the companies' business operations, said people familiar with the matter.
  • In Interview, Murdoch Defends News Corp.(NWSA)
  • California Bill Requiring Gay History in Schools Signed Into Law. Gov. Jerry Brown has signed a bill making California the first state in the nation to add lessons about gays and lesbians to social studies classes in public schools. Mr. Brown, a Democrat, signed the landmark bill requiring public schools to include the contributions of people who are gay, lesbian, bisexual and transgender in social studies curriculum. The Democratic-majority Legislature had passed the bill last week on a largely party-line vote. The new law, SB48, requires the California Board of Education and local school districts to adopt textbooks and other teaching materials that cover the contributions and roles of sexual minorities, as soon as the 2013-2014 school year. The legislation leaves it to local school boards to decide how to implement the requirement. It does not specify a grade level for the instruction to begin. Randy Thomasson, president of SaveCalifornia.com, a conservative family group, said under the new law parents will have no choice but to take their children out of public school and homeschool them to avoid what he said was "immoral indoctrination." The new law applies only to public schools, not private schools or families who homeschool.
  • Flir(FLIR) Forecasts Weak 2Q Results on Government Demand Decline. Flir Systems Inc. (FLIR) predicted profit would fall in the second quarter as continued weak government demand weighed on revenue. Shares in the night-vision goggle maker fell 8.1% to $29.50 in after-hours trading.
  • Blockbuster Looks To Woo Netflix(NFLX) Customers With DVD Promo. Blockbuster LLC on Thursday unveiled a DVD-rental promotion aimed at swiping customers from Internet-based rival Netflix Inc. (NFLX), taking aim at the online video service two days after Netflix raised its prices.
  • Key Credit Gauge Loses Clout. Low Demand for Overnight Loans Means Libor Status as Measure of Banks' Health Is Waning. A crucial barometer of global banking health is losing its clout as a macroeconomic indicator, but the move is benefiting some consumers and others whose low interest-rate loans still are pegged to it.
  • Time to Short the Euro? On Friday, long-awaited results of Europe's bank "stress tests" could push the euro lower. With Europe's debt woes mounting, some savvy currency investors are shorting the euro against the dollar -- a bold bet considering the greenback's own shaky status.
  • The Obama Downgrade. The real reason the U.S. could lose its AAA rating. Americans should understand that the debt ceiling is merely the trigger. The gun is the spending boom of the last three years and the prospect that Washington lacks the political will to reduce it in the years to come. On spending, it is important to recall how extraordinary the blowout of the last three years has been. We've seen nothing like it since World War II. Nothing close.
Business Insider:
  • Pentagon Admits 24,000 Files Were Hacked, Declares Cyberspace A Theater Of War. Unveiling the military's first-ever cybersecurity strategy, Deputy Secretary of Defense William Lynn admitted today that a "foreign intelligence service" stole 24,000 Defense Department files from Pentagon computer systems this March. The hack — one of the largest the Pentagon has ever suffered — was data-related, Lynn said. "A great deal of it concerns our most sensitive systems, including aircraft avionics, surveillance technologies, satellite communications systems, and network security protocols."
  • Tensions Escalate In Asia and Could Possibly Lead To War. It's China vs. Vietnam and the Philippines.
IBD:

Forbes:
  • The Next Crisis Will Arise in the BRIC Countries. A steep rise in credit; rapid increases in house prices to levels way beyond available income; use of overvalued property as further collateral to demand additional funding from the banking system, resulting in even higher levels of debt; an increase in the amount of credit needed for the marginal growth of gross domestic product; a constrained installed capacity that yields to inflationary tensions; a labor force with double digit wage rises; limitless liquidity flowing into sectors with low productivity, such as real estate; a relaxation of the rules for granting loans; a rapid increase in corporate debt as a consequence of accelerated investment, mergers, and acquisitions, all fanned by the intoxicating feeling that demand will just keep going up; a central bank incapable of containing such a self-complacent liquidity binge, with interest rates far below those recommended by the Taylor rule; a political class living off an apparent bonanza, refusing to carry out the reforms needed to avoid disaster when the cycle eventually changes, ignoring calls for serious cutbacks in spending, or rises in taxes that could counteract the exuberance. Spain in 2006? The U.S.? Britain? Iceland, Greece, Ireland? No. I am talking about emerging countries, in particular Brazil, Russia, India and China, the four known collectively as the BRICs.
LA Times:
BankThink:
  • Bank of America's(BAC) Alarmingly Modest Goal for Basel III Capital. During the credit crisis, Bank of America Corp. symbolized everything that was wrong with banking: a too-big-to-fail global bank with questionable acquisitions (Countrywide and Merrill Lynch), poor lending standards, and poor liquidity and capital management – one that received capital injections from the government time and again. Regulators and legislators must have had B of A in the back of their minds while crafting a new regulatory framework for banks in the form of Basel III and Dodd-Frank. Astonishingly, it appears that B of A does not understand the role it played in the crisis.
Rasmussen Reports:
Reuters:
  • Google(GOOG) Smashes Street Expectations, Shares Surge. Google Inc's results soundly trounced Wall Street's most bullish expectations, sending its shares up 12 percent and easing concerns that its battle with Facebook and Twitter is costing too much and hindering growth. The Internet giant's flagship search advertising business, combined with new efforts like display and mobile advertising, boosted the company's revenue by 36 percent in its first three months under the helm of new Chief Executive Larry Page. The media-averse Page, who provoked grumbles by saying only a few words on the last quarterly earnings call, ticked off a string of fresh statistics on Thursday that underscored the company's progress on various fronts, including the strong start for its 2-week old social networking service. Page told analysts the company had signed up more than 10 million people for Google+: the company's biggest foray into the hot social networking arena and the vanguard of its battle with Facebook and Twitter for websurfers' time and attention. "Google should be viewed as a growth company again this quarter," said Stifel Nicolaus analyst Jordan Rohan. "The combination of mobile search, Android, ad exchange, YouTube, and the core search businesses, they're all doing well. Google is no longer a one-trick pony."
Financial Times:
  • Merkel Warned on Greek Bail-Out Standoff. Pressure mounted on Angela Merkel, the German chancellor, to make a quick decision on how to get private bondholders to pay part of a new €115bn Greek bail-out, with senior Italian officials and the IMF warning that continued uncertainty risked undermining the eurozone. The calls came as fears that a stalemate could last through the summer forced Rome to pay some of its highest rates on record in order to borrow €3bn ($4.3bn) from the bond market.
City A.M.:
  • Europe's Debt Crisis is Getting Worse. The numbers are big. As of this May, Eurozone banks had made loans to Eurozone governments of €1.156 trillion and held securities issued by them of €1.442.7 trillion, while their capital and reserves totalled €2.118.8 trillion, says International Monetary Research. The problem is that the system as a whole would be in deep trouble if the losses on Eurozone government bonds end up higher than €500bn. And of course such losses would hit different institutions in very different ways: many would not be able to survive even a much smaller overall loss. This is going to be a long weekend. Let’s hope it is a false alarm.
Passauer Neue Presse:
  • Hans-Werner Sinn, head of the Munich-based Ifo economic institute, said that Greece faces a decade-long "illness" if it stays in the euro area and tries to increase its competitiveness by lowering wages and prices, citing an interview with Sinn. A return to its old currency, the drachma, would be an easier route for Greece, Sinn said.
Folha de S. Paulo:
  • Venezuelan President Hugo Chavez accepted an offer from Brazilian President Dilma Rousseff to receive treatment for cancer in Sao Paulo. Chavez may be treated at the Sirio Libanes hospital.

Sydney Morning Herald:
  • Abbott Eyes Mandate to Dump Carbon Tax. TONY ABBOTT says he will call a double dissolution election if he wins power and Labor and the Greens combine in the Senate to stop him from repealing the carbon tax. The Opposition Leader, who is sitting on a massive election-winning lead in the polls, issued the edict in front of a community forum in Brisbane last night. He said if the government was ''walloped'' at the next election over the carbon tax, it would be unthinkable that a humiliated Labor would not allow an Abbott government to rescind it.
Chosun Ilbo:
  • The U.S. has proposed capping each nation's foreign exchange reserves during the Group of 20 finance ministers' meeting in Paris earlier this month, citing a South Korean official.
South China Morning Post:
21st Century Business Herald:
  • Beijing's new home prices fell 7% in June as compared with May, citing data from the Beijing Municipal Commission of Housing and Urban-Rural Development. The Chinese capital's restrictions on home purchases will be kept for "a long period," citing Yang Bin, director of the Beijing housing commission.
  • China's 17 major banks saw total outstanding lending rise by about 7 to 9% to the end of June from the beginning of the year, to more than $340 billion, citing data.
International Oil Daily:
  • The administration of U.S. President Barack Obama is considering a second sale of oil from its strategic petroleum reserve, citing several people in the market. The amount would be similar to the first 60 million-barrel release led by the IEA, including 30 million barrels sold by the U.S., Oil Daily said.
Evening Recommendations
  • None of note
Night Trading
  • Asian equity indices are -.50% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 120.50 -1.5 basis points.
  • Asia Pacific Sovereign CDS Index 124.25 +1.75 basis points.
  • S&P 500 futures +.01%.
  • NASDAQ 100 futures +.46%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (MAT)/.16
  • (C)/.96
  • (GPC)/.89
  • (FHN)/.11
  • (WBS)/.35
Economic Releases
8:30 am EST
  • The Consumer Price Index for June is estimated to fall -.1% versus a +.2% gain in May.
  • The CPI Ex Food & Energy for June is estimated to rise +.2% versus a +.3% gain in May.
  • Empire Manufacturing for July is estimated to rise to 5.0 versus a reading of -7.79 in June.
9:15 am EST
  • Industrial Production for June is estimated to rise +.3% versus a +.1% gain in May.
  • Capacity Utilization for June is estimated to rise to 76.9% versus 76.7% in May.
9:55 am EST
  • Preliminary Univ. of Mich. Consumer Confidence for July is estimated to rise to 72.0 versus a reading of 71.5 in June.
Upcoming Splits
  • (SNHY) 3-for-2
Other Potential Market Movers
  • The EU bank stress test results could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and real estate shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

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